Question

The banking crisis of 2008 is quite interesting to analyze. The factors that led to this near banking collapse are intriguing to say the least. In this exercise you will be evaluating the factors that led up to the crisis and determining which ones could have created this scenario. There is no simple answer to what led to the banking crisis, as there were many factors that contributed over a long period of time. Understanding the factors that led to the crisis is very important, as such an understanding will help regulators prevent similar situations in the future.
Fore each item listed, select how much it contributed to the banking crisis.

1. The repeal of some provisions of the Glass-Steagall Act of 1933
a. Major contributor
b. Not a major contributor

2. Savvy individual investors
a. Major contributor
b. Not a major contributo

3. The Community Reinvestment Act (CRA)
a. Major contributor
b. Not a major contributor

4. Borrowersâ lack of financial knowledge
a. Major contributor
b. Not a major contributor

Answer 1

Answer:

1. The repeal of some provisions of the Glass-Steagall Act of 1933

a. Major contributor

The repeal of some of the provisions of the Glass-Steagall Act led to lesser restrictions on the banking industry which allowed for the kind of investments that banks made leading up to 2008 that led to the crisis.  

2. Savvy individual investors  

b. Not a major contributor

Savvy individual investors knew how to invest and what to invest in and mostly avoided the securities that caused the crisis.  

3. The Community Reinvestment Act (CRA)

a. Major contributor

The CRA allowed for banks to be able to lend money to lower income households who were the major defaulters on the mortgages which was a major contributor to the crisis.  

 

4. Borrowers lack of financial knowledge

a. Major contributor.

A lot of the borrowers did not understand what they were getting into and so when time came to pay back, they ended up being unable to. A fact which contributed in no small way to the banking crisis.